‘The Problem with CLASS Is That It’s Voluntary.’
As I write, the House is debating a bill that would repeal the CLASS Act, one of two new entitlements created under ObamaCare. It’s hard express just how awful this program is. Here’s my attempt from back in October, when the Obama administration admitted CLASS is a bust:
The idea behind CLASS was that the government would run a voluntary and self-sustaining insurance plan to help the disabled pay for long-term care, including nursing home care…
Congress required CLASS to set each applicant’s premiums according to the average applicant’s risk of needing such long-term care, rather than her individual risk. But averaged premiums are only attractive to people with above-average risks. Since few people with below-average risks would enroll, the average premium would rise. That would encourage more people with below-average risks not to enroll, and the vicious cycle would continue until the program collapsed.
As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more.
Everyone with a rudimentary understanding of insurance saw this coming. The government’s non-partisan actuaries warned of “a very serious risk” that CLASS would be “unsustainable.” One wrote, “Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue.”
The Democratic chairman of the Senate Budget Committee called CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” An Obama administration official wrote, “Seems like a disaster to me.” One of President Obama’s own cabinet secretaries called the program “totally unsustainable” and echoed a presidential commission on fiscal responsibility by recommending it be “reformed or repealed.”
Sen. Tom Harkin (D-IA) has diagnosed the fatal flaw in this most ill-conceived government program. I swear, I am not making this up:
The problem with CLASS is that it’s voluntary.
Harkin isn’t the first person to wistfully lament that CLASS would be such a great program if only we could put non-participants in jail. He’s just the first person I know of who has said so explicitly. Others have said that the collapse of the CLASS Act should inspire confidence in the rest of ObamaCare, which imposes the same type of price controls on health insurance, and then threatens to put people in jail if they don’t buy it. Here’s how I described that strategy back in October:
Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer?
Rather than make the CLASS Act compulsory, Congress should make the rest of ObamaCare voluntary:
[Ezra] Klein writes, “One way of looking at the administration’s [CLASS] decision is that it shows a commitment to fiscal responsibility.” If so, then let’s handle the rest of Obamacare exactly the same way. Congress should require Obamacare’s health insurance provisions to be voluntary and self-sustaining, just like CLASS: no individual mandate, no taxpayer subsidies. Or is fiscal irresponsibility part of the plan?
Harkin and other ObamaCare defenders have a profound lack of respect for other people’s freedom and dignity. The problem with that is that it’s voluntary. If it were a medical condition, it might be excusable.
The CLASS Act: This Is Confidence-Inspiring?
In the Daily Caller, I explain how the failure of ObamaCare‘s “CLASS Act” highlights the fatal flaws in the rest of the law:
As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more…
In the face of this setback, Obamacare supporters are naturally declaring victory. Jonathan Cohn of The New Republic sees “vindication.” Kevin Drum of Mother Jones proudly announces, “What happened here is that government worked exactly the way it ought to.” The Washington Post’s Ezra Klein instructs, “The CLASS experience should, if anything, make us more confident in the underlying law.” It’s hard to argue with such logic, but let’s try…
Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer?
So if you’d like secure protection from illness and impoverishment, repeal ObamaCare. Or say your prayers.
‘So How Are Democrats and Republicans Different?’
I present you Robert Laszewski’s magnificent take on ObamaCare and Wisconsin, Democrats and Republicans.
Filed under: Cato Publications; General; Government and Politics; Health Care
Ezra Klein vs. the Secretary of Agriculture
It seems that Secretary of Agriculture Tom Vilsack took exception to Ezra Klein’s recent blog post on “Why we still need cities”. Someone at the USDA emailed Ezra, outlining the Secretary’s concerns and to set up a time for the two of them to talk. Ezra took notes during their discussion and, yesterday, posted a “lightly edited” transcript of their conversation.
The Secretary had plenty of the standard talking points on hand — and some new ones, like the fact that we should support farm subsidies because rural America has good values and farmers don’t feel appreciated – but Ezra expertly took him to task, deftly pushing back on the non-sequiturs, questionable assumptions and enduring myths about the need for farm subsidies. He even gets in a worthy swipe at sugar tariffs and the “need” to produce all our food in America. Read the entire thing; it is worth your time.
(HT: Justin Logan)
What on Earth Is Ezra Klein Talking about?
The Washington Post‘s Ezra Klein writes:
It’s put-up-or-shut-up time for Republicans. They managed to make it through the health-care debate without offering serious solutions of their own, and – perhaps more impressive – through the election by promising to tell us their solutions after they’d won. But the jig is up. They need a health-care plan – and quickly.
The GOP knew this day would come.
Say what? Exactly what political factors are forcing the GOP to put up or shut up? Their base is happy; it wants an all-out assault on ObamaCare, and congressional Republicans are giving it to them. Republicans are even winning the ObamaCare debate among the broader public:
So why should Republicans all of a sudden stop attacking ObamaCare and start talking about their own refor–ohhhh…I see. Klein is trying to talk the dog off the meat wagon. Good luck with that.
Why Ryan-Rivlin Beats ObamaCare on Costs — and Spending
Washington Post blogger Ezra Klein asks of Rep. Paul Ryan’s (R-Wisc.) Medicare voucher proposal (co-authored with former Congressional Budget Office director Alice Rivlin):
Why are the cost savings in his bill possible, while the cost savings in the Affordable Care Act aren’t?…when it comes to the ACA, Ryan firmly believes that seniors will quickly and successfully force Congress to reverse any reforms that degrade their Medicare experience. That’s a fair enough concern, of course. What’s confusing is why it isn’t doubly devastating when applied to Ryan-Rivlin.
Set aside that Klein violates Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending. And that he uses the word “affordable” to describe ObamaCare.
There are two reasons why the Medicare spending restraints in the Ryan-Rivlin proposal are more likely to hold than those in ObamaCare.
First, ObamaCare’s restraints amount to nothing more than ratcheting down the price controls that traditional Medicare uses to pay health care providers. Structuring Medicare subsidies in this way — setting the prices that Medicare pays specific providers — makes it very difficult to lower those prices, because the system itself creates huge incentives for providers to organize and lobby to undo those restraints. As I explain more fully in this op-ed from September 2010, Medicare vouchers would change that lobbying game by reducing the incentives for provider groups to expend resources in the pursuit of higher Medicare spending. That gives the Ryan-Rivlin restraints a much better shot at surviving. (Seriously, it’s a pretty cool feature.)
Second, Klein predicts a backlash against Medicare vouchers because he says it amounts to “giving seniors less money to purchase more expensive private insurance.” The notion that Medicare is less costly than private insurance is pure, uninformed nonsense. Medicare and a “public option” are attractive to the Left precisely because such programs hide the full cost of their operations from enrollees and taxpayers. It is a virtue of vouchers that they would reveal to Medicare enrollees the actual prices of the coverage and services they demand, because that information will spur enrollees to be more cost-conscious when selecting a health plan and consuming medical services. That, in turn, will force insurers and providers to compete on the basis of cost to a degree never before seen in this nation, competition that will generate the sort of cost-saving innovations that Jim Capretta discusses here.
Both of these reasons boil down to the truism that nobody spends other people’s money as carefully as they spend their own. We’ll make a lot of progress in this country when the Left realizes how much damage they’ve done by ignoring that truism.
Saving Hayek from the People Who Think They’re Saving Hayek
I’ve been noticing a game lately played in the bookish corners of the left side of American politics. We’ll call it “We Know Hayek Better Than You.” It’s a game not without some attendant dangers. But it’s nothing if not fun.
Writing at Ezra Klein’s spot in the Washington Post, Karl Smith quotes Friedrich Hayek as follows:
That the ideal of justice of most socialists would be satisfied if merely private income from property were abolished and the differences between the earned incomes of different people remained what they are now, is true. What these people forget is that in transferring all property in the means of production to the state they put the state in a position whereby its action must in effect decide all other incomes.
He glosses:
That is, as Hayek goes on to explain, there is nothing fundamentally wrong with communal ownership of the means of production. The mistake is to think that the government could facilitate such ownership because then the government is effectively a monopolist and that would give the government almost unlimited power.
The idea that in principle it would be okay to completely redistribute all capital wealth is far to the left of anything proposed in modern America.
I hate to say it, but this is quite the dog’s breakfast of confusion, misinterpretation, and strained reading. One ought to be suspicious when your author writes an entire book entitled The Mirage of Social Justice. Perhaps he’s not really too enthused about social justice, you know.
Although it’s probably true that most socialists‘ idea of justice would be satisfied if income from private property were abolished, it does not follow that this was Hayek’s idea of justice. Hayek didn’t think it was “okay” to collectivize the entire means of production, whether by the state or by private action.
The ability to accumulate capital and to believe that one held it justly was, for Hayek, a most important incentive for the formation of responsible individuals. If the means of production were collectivized, individual character would suffer, and society would suffer with it. He wrote:
A free society will not function or maintain itself unless its members regard it as right that each individual occupy the position that results from his action and accept it as due to his own action. Though it can offer to the individual only chances and though the outcome of his efforts will depend on innumerable accidents, it forcefully directs his attention to those circumstances that he can control as if they were the only ones that mattered (The Constitution of Liberty, Chicago: University of Chicago Press, 1978, p. 78).
The sense of responsibility has been weakened in modern times as much by overextending the range of an individual’s responsibilities as by exculpating him from the actual consequences of his actions… To be effective, responsibility must be both definite and limited, adapted both emotionally and intellectually to human capacities. It is quite as destructive of any sense of responsibility to be taught that one is responsible for everything as to be taught that one cannot be held responsible for anything…
Responsibility, to be effective, must be individual responsibility. In a free society there cannot be any collective responsibility of the members of a group as such, unless they have, by concerted action, all made themselves individually and severally responsible… If the same concerns are made the responsibility of many without at the same time imposing a duty of joint and agreed action, the result is usually that nobody really accepts responsibility. As everybody’s property in effect is nobody’s property, so everybody’s responsibility is nobody’s responsibility (ibid., p 83).
So no, Hayek wouldn’t have thought it was a good idea to collectivize the means of production. There are some interesting theoretical questions hereabouts regarding corporations, their appropriate size, responsibilities, and attendant knowledge problems, but I suspect that my friends on the left aren’t actually pining for one megacorporation to rule them all. (Are they? I know it can be tough to keep up, but really, this is too much. Even I don’t support that.)
Hayek tells us we have private property and private capital because it does good things to the individual character. While there will be accidents, and while life is sometimes truly unfair, the best course of action is nonetheless for everyone to work as though their efforts actually mattered. And the best way to ensure that they will do so is to allow their efforts, whenever possible, to matter.
And when individual initiative has failed, what did Hayek want then? He wanted a modest system of social insurance — with emphasis on the modesty. After that, he wanted very stern incentives for people to get back up on their feet and leave that system.
One incentive that he considered at least reasonable was to forbid welfare recipients (and government workers!) from voting — an idea far to the right of anything now being considered in America. But not a bad idea in the abstract. He wrote:
It is also possible for reasonable people to argue that the ideals of democracy would be better served if, say, all the servants of government or all recipients of public charity were excluded from the vote (ibid., 105).
I look forward to my friends on the left continuing to deepen their knowledge of Hayek, and maybe entertaining this modest proposal. Were it not for my overwhelming concerns about how our current welfare system entraps its recipients, I might even support it myself.
Why Won’t This Pig Fly? I’ve Tried Everything . . .
It’s fascinating to read Progressives as they think through a difficult policy problem. Kevin Drum writes (at Mother Jones!) that we can’t improve education or mitigate poverty:
“I continue to think that the biggest problem here is simply that no one has any really compelling answers. . . You can go down the list of every ed reform ever touted, and they either can’t scale up, turn out to have ambiguous results when proper studies are done, or simply wash out over time. . .
So is the answer to address concentrated poverty? Sure. Except that, if anything, attempts to address poverty have a worse track record than attempts to improve education.
I would really, really like someone to tell me I’m wrong. So far, though, no one has. At least, not to my satisfaction. But I’m willing to be schooled if anyone thinks I’m missing the big picture here.”
Wow, Progressives really are depressed this year. Ezra Klein, mostly agrees, Matt Yglesias and Kevin Carey seem more optimistic. But I doubt any of them have compelling answers for Drum’s concerns.
So Kevin, Ezra, I’m here to tell you . . . you’re wrong. Let me rephrase that. You are right that all your Progressive solutions to these problems are perpetual and necessary failures. But there is a solution.
We know what improves education, allows success to scale quickly, and saves money as well; a real market in education, aka private school choice, the freer and broader the better. The education problem is intractable only if the government continues to monopolize education services.
As I noted just the other day in response to Rhee’s resignation, the government school system is unreformable.
Meanwhile, the evidence is consistent and clear that private school choice, markets in education, work. And private school choice even helps the kids who remain in government schools. Ah, and it saves a lot of money.
I really can’t say it any better than Andrew Coulson, our director here at CEF, slightly edited; “Given that quality and productivity in every other sector of human activity have been maximized through the operation of minimally regulated markets, and that the same pattern can be seen in the field of education, it seems to me that we should emphasize the need to ensure the broadest possible access to the freest possible education marketplace.”
I can feel it . . . Drum and company are just this close to being mugged by reality.
Shifting the Blame for America’s Health Care Woes
I must be losing my touch. I’ve let nearly two months pass without responding to Ezra Klein’s defense of RomneyCare, ObamaCare, and other centrally planned health care systems. (For those who want to get up to speed: his original post, my reply, and his response.) So here goes.
Klein notes that he and I had each used flawed measures of RomneyCare’s impact on health insurance premiums in Massachusetts. Fair enough. But Klein ignores the study I cited by John Cogan, Glenn Hubbard, and Dan Kessler, which estimates that RomneyCare increased premiums in Massachusetts by 6 percent. The CHK study has limitations, but it is the best estimate available. I hope Klein addresses it.
Klein’s fallback position is that even if RomneyCare increases premiums, that’s not an indictment of the law because cost-control was not one of its goals. Never mind that Mitt Romney boasted, “the costs of health care will be reduced.” Klein knows political rhetoric when he sees it. Yet he oddly sees no parallels between the phony-baloney promises of cost-control used to sell RomneyCare and the phony-baloney promises of cost-control used to sell ObamaCare — despite ample assistance from people like Medicare’s chief actuary and Alain Enthoven (“the American people are being deceived“).
Then Klein throws down his trump card:
[E]ven a cursory read of the evidence would show that whatever the drawbacks of central planning, it covers people at an extremely low cost. Romney Care’s cost problem is a result of pasting a coverage-oriented quick fix atop our insane health-care system. Compare its costs to the British system, the French system, the German system, or any other system, and whatever your conclusions, you won’t walk away unimpressed by the ability of centralized systems to cover whole populations for much less money than we spend.
Oy, where to begin? First, Klein violates Cannon’s First Rule of Economic Literacy: he writes that centrally planned systems cost less, when what he means is that they spend less.
Second, the phrase “whatever the drawbacks of central planning” is some serious hand-waving. Those “drawbacks” include (among other things): the Medicare program’s suppression of comparative-effectiveness research, error-reduction efforts, care coordination, and other delivery innovations; Canada’s human-rights violating Medicare system; and the suppression of untold innovations in health insurance and medical treatment by government price controls. Other than a few drawbacks, Mrs. Lincoln…
What’s the Ideal Point on the Laffer Curve?
There’s been a bit of chatter in the blogosphere about a recent post on Ezra Klein’s blog, featuring estimates from various economists about the revenue-maximizing tax rate. It won’t come as a surprise that people on the right tended to give lower estimates and folks on the left had higher guesses. Donald Luskin of National Review estimated 19 percent, for instance, while Emmanuel Saez, Dean Baker, Bruce Bartlett, and Brad DeLong all gave answers around 70 percent.
There are two things that are worth noting.
First, every single answer is to the right of the Joint Committee on Taxation. The revenue-estimators on Capitol Hill assume that taxes have no impact on overall economic performance. As such, even confiscatory tax rates have very little impact on taxable income. The JCT operates in a totally non-transparent fashion, so it is difficult to know whether they would say the revenue-maximizing tax rate is 90 percent, 95 percent, or 100 percent, but it is remarkable that a mini-bureaucracy with so much power is so far out of the mainstream (it’s even more remarkable that Republicans controlled Congress for 12 years, yet never fixed this problem, but that’s a separate story).
Second, very few of the respondents made the critically important observation that it should not be the goal of tax policy to maximize revenue. After all, the revenue-maximizing point is where the damage to the overall economy is so great that taxable income falls enough to offset the impact of the higher tax rates. Greg Mankiw of Harvard and Steve Moore of the Wall Street Journal indicated they understood this point since they both explained that the long-run revenue-maximizing rate was lower than the short-run revenue-maximizing rate. But Martin Feldstein of Harvard explicitly addressed this issue and hit the nail on the head.
Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy) rises. So as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.
For more information, I think my three-part video series on the Laffer Curve is a good summary of the key issues. I posted them in May 2009, but Cato-at-Liberty has been growing rapidly and many people have not seen them. Part I addresses the theory, and explicitly notes that policy makers should target the growth-maximizing tax rate rather than the revenue-maximizing tax rate. Part II reviews some of the evidence, including analysis of the huge increase in taxable income and tax revenue from upper-income taxpayers following the Reagan tax-rate reductions. Part III looks at the Joint Committee on Taxation’s dismal performance.
When Keynesians Attack, Part II
I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.
Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”
This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.
But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.
When Keynesians Attack
If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic‘s site.
At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.
The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).
But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:
(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.
When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.
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